Economics

The euro crisis

Europe bleeds out

IT IS a car crash of a data release. One simply can't look away. Hard to know precisely which part of the euro area's latest unemployment report is the most grimly compelling. The overall rate, at 12.1%? In the spring of 2010 unemployment rates in America and the euro zone were effectively the same at about 10%. There is now a gap of 4.5 percentage points. Total unemployment? In the first three years of the downturn America did far worse than the euro area, adding some 7.5m workers to the unemployment rolls to Europe's 4.7m. Since then total unemployment in the euro area has risen by another 3.2m while America reduced the ranks of the jobless by 3.5m. The euro area now has some 19.2m unemployed workers.

Individual country numbers inspire their own brand of horror. Greek joblessness topped 27% in January (the most recent month for which data there are available), while Spanish employment has risen to 26.7%. Joblessness in France rose by slightly more in the year to March than it did in Italy. And did you know that Dutch unemployment rose by 1.4 percentage points over the past year? German unemployment, of course, has held steady at 5.4% since last summer.

It is the youth figures that are most remarkable, however: 59.1% of those under 25 are unemployed in Greece, 55.9% in Spain, 38.4% in Italy, 38.3% in Portugal, 26.5% in France—3.6m youths in all.

There is blame to go around for this, but one has to reserve special criticism for the European Central Bank. The Federal Reserve's main policy rate has been effectively zero since late 2008; the ECB's has never fallen below the current 0.75% level. The Fed has undertaken major asset-purchase programmes in an effort to raise growth expectations, lower interest rates, and improve lending conditions; the ECB deployed a special lending programme to banks last year in order to prevent a systemic collapse, but its balance sheet has since been shrinking as those loans are repaid. The Fed has reacted to weakening inflation and inflation expectations and has linked policy changes to labour market indicators. The ECB has presided over a wrenching disinflation that has brought inflation well below target, and which is both a consequence of recession and itself an implement of macroeconomic pain. Europe's governments have behaved badly, but American fiscal policy has hardly been better. The ECB faces a more complicated set of political constraints, but it has already proven how adroitly, aggressively, and inventively it can act when necessary.

The ECB meets this week. On Thursday it may announce an interest-rate cut; if it doesn't it is probable that a cut will be made in June. But a rate cut will not be enough, not remotely. As things stand ECB policy is scarcely being transmitted to the periphery, where rates to firms and households are far higher than in Germany. The euro area needs a jolt to expectations, targeted credit easing designed to improve peripheral liquidity, and broad quantitative easing. Mario Draghi has surprised markets before. Hopefully he will do so again. Because at the moment, the ECB is behaving as though the main economic failure in the 1930s was the world's pathetic inability to grit its teeth and endure the costs of tight money.

This article gives America too much credit for what it does and not enough for what it is.

Yes, unemployment is lower in America than in most of Europe. However, the U6 rate, which measures those who have given up on work, is at a level comparable to European unemployment. In addition, more Americans work part-time than ever before and jobs are pooling in low-wage areas such as retail and food service.

The Fed HAS, indeed, been aggressive with monetary policy -- but it is hard to judge the result. Some areas of the economy, such as housing, have experienced a mini-boom and that puts people back to work. However, savers have been robbed blind, as have all those on fixed incomes, so the real result is just an impoverishment of one sector of the population in order to transfer wealth to another sector. There are plenty of front page stories about new housing starts -- not so many about deferred or abandoned purchases on the part of those tens of millions who have seen their interest income run to zero.

American kids generally can find jobs -- although they have a good long wait after graduation. It is doubtful the Fed deserves any credit for this. No employer decides to hire based on what the federal funds rate is that month.

What America DOES have is a genuine continental economy with a single central bank and a tradition of extreme labor mobility. It also has a welfare policy less generous than that of most of Europe and this is a real incentive for people to take responsibility for their own lives. It has taken more than two centuries for all this to evolve and none of it is government policy. It is just what America is, regardless of what party is in power.

Finally, there is the extraordinary political stability of the USA. There are no parliamentary crisis since America has a presidential system. There are no coalition issues since America has only two political parties. Political change occurs entirely by the calendar and is as predictable as the phases of the moon.

(Europeans love to criticize America's "violent gun culture" but prefer not to notice the rock-solid peacefulness and stability of the American political system from the White House down to the local village constable. All in all, America is the safest and most stable place on the globe -- except for Canada, which is really just the USA North.)

In short, neither the Fed nor the Administration nor Congress really can claim that much credit for relative American success. It is bred in the nation's bones. Americans expect to have to support themselves; they expect to have to move to find work; there is not a single barrier of language, law or custom to impede trade; the political system is utterly sound; governmental uncertainty is impossible because of the the presidential system; a single true central bank regulates currency; a single legislative assembly (Congress) sets fiscal policy for the whole 3 million square miles.

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It is the youth figures that are most remarkable, however: 59.1% of those under 25 are unemployed in Greece, 55.9% in Spain, 38.4% in Italy, 38.3% in Portugal, 26.5% in France—3.6m youths in all.
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That's a grotesque error. No: "59.1% of those under 25 are unemployed in Greece". Rather, of those under 25 but in the labor force in Greece, 59.1% are unemployed.
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Among under 25s in Greece, 68.8% are in formal education or training but not employed, 10.9% are employed, 6.4% are unemplyed (hence 59.1% youth unemployment from 6.5/10.9) and 13.7% are not in the labour force (e.g. educational "drop outs", young mothers, the disabled, discouraged workers, etc).
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So, that's an under-25 NEET (not in employment, education or training) rate of 20.3% for Greece. That's very bad (much worse than France at 12.2% or the UK at 14.0%), but it's nowhere near as bad as Turkey (28.7%). Incidentally, the US NEET rate is closer to Greece than it is to France.
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Other than that, good post. The unemployment situation is a human disaster. That proves how great it is that we have welfare (so everybody in Western Europe still has full health cover and enough income to live). But we absolutely must reform institutions to support easier founding of new businesses, shift incentives to support new recruitment, ensure that there's support for the unemployed in training & acquiring in-demand skills, etc.

Can you seriously imagine that the difference in commercial and consumer loan rates between bank rates 0% and 0.75% would keep a businessman confident in his success and a consumer secure in his job from borrowing the money to go ahead with their plans?
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Cheap money and tax cuts cannot restore confidence after everyone has stared into the economic abyss.

There is an old joke about a guy the police stopped for blowing a horn in the park to keep elephants away. The police told him there are no elephants in the park. The guy responded “Then I’m doing a good job!”

The problem with horn blower’s logic is that many things might be keeping elephants away, so he can’t take credit for the absence of elephants. That would be the post hoc fallacy.

However, if he had been blowing his horn for weeks and still the park was overrun with elephants, it would be easy to see that he had failed. He is not allowed to say “It would have been worse without me” because he can’t know that. That would be the non sequitur ( "it does not follow") fallacy.

The Fed has been blowing its horn for years and failing. You can’t say that the Fed prevented a double dip when there was no danger of one threatening. And you can’t say it would have been worse, because no one can know that.

Sound monetary theory says it’s good for the Fed to reduce rates at the beginning of a recession in order to satisfy demand for money. We can know it succeeded at that because deflation was short and mild, but beyond that continued loose policy does more harm than good.

Loser (looser) monetary policy and more government spending will not save Europe. Only the private sector can do that, but before it can the state has to loosen the chains that keep it tied down.

Perhaps we are watching an unplanned experiment in determining what rate and duration of unemployment leads to political upheaval. Not merely a change of faces in government, but changes in types, boundaries and systems of law. Interesting times.

I seem to remember graduating with a STEM degree in 2009 from a good school. Then I also remember getting sick with MS a year before that happened. I also remember having to flee the country to find both a job and health insurance, because the US wanted to foster self reliance.

(Did you know that Norway, Denmark, Canada and a host of other northern European countries have a higher amount of entrepeneurs per capita than we do? Maybe it's because they know that things like health insurance and such are done by the government so they don't have to worry about losing it.)

With respect, you've made reference to the fact that you are a no longer a young person. It's frustrating to hear people of you're generation say that finding a job is easy for my generation or that those jobs are comparable to the type of thing a young person could get even 20 years ago.

The ECB has a firm inflation target of 2.0%. Which means certainty of monetary easing over the next 6 months (in pursuit of target).

That will probably involve a small reduction of interest rates (though that won't have massive impact - it would be felt hardest in Switzerland & Denmark, which would have to buy up assets in the euro area to maintain exchange rate policies).

In Italy, with 16.9% of GDP in debt maturing annually, the recent 200 basis point reduction in yields (to 3.90%) means that the fiscal deficit will fall by itself in decrements of 0.2-0.3% of GDP annually for every one of the next 7 years (from 3.0% in 2013). If interest rates fall a further 200 basis points (to French levels), that annual gain deficit reduction (without pain) would improve to the 0.5-0.6% of GDP range. Healthy primary fiscal surpluses are actually accomplishing something beautiful.

So there's something nice - we can only hope for cleaning up of politics, killing of corruption, economic liberalization, less government waste, tax rationalization, improved investment in education, training & R&D, higher retirement ages, etc.

Can you seriously imagine that the difference between 0% and 0.75% would keep a businessman confident in his success or a consumer secure in his job from borrowing the money to go ahead with their plans?
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Cheap money and tax cuts cannot restore confidence after everyone has stared into the economic abyss.

If the US had four states in as much financial trouble as the Big EZ, we would be in the same shape. RA seems to think nothing happened in Europe other than the ECB refused to drop rates another half a point. Judging by the failure of multiple rounds of QE in the US, how can anyone expect better results in the Big EZ?

"Borrow to prosperity" doesn't put the emphasis where it belongs. Balance sheet operations which create liabilities (borrowing) in order to create assets with higher yield than the debt, providing there is sufficient equity/ capital to safeguard stability, is a bloddy good thing.

We do need competitive & well-allocated investment finance (ignorant of state borders), along with patent reform, labour market reform, deregulation and general destruction of barriers to entry.

Germany's unemployment was 5.4% - not terrible; it has a budget surplus, and a CA surplus big enough to choke a whale. This country does not need and cannot tolerate any kind of QE, let alone the radical kind you propose - the rest of the world too can't tolerate that for Germany. Yeah, others may need that, but the law calls for the kind of policy that happens to the one Germany needs - that's that.
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Now, if Germany and a few others left the EZ for EZ2, then maybe ....

The "failure of QE" commits the (insert latin term) fallacy that QE did nothing because things are still bad.

Here's an example of what I mean.

Imagine that two people have a motorcycle crash. One of them wore a helmet and the other one didn't. The guy who wore a helmet is horribly injured.

You may look at the helmet guy and conclude "The helmet did nothing. His arms are broken. His lung is punctured. He may be paralyzed from the waist down. Obviously, the helmet failed."

"Now the guy without a helmet is even worse off since he has all of the above wounds and a traumatic brain injury. But since the helmet failed to prevent all of the damage in the first guy. There's no point in wearing one."

QE didn't save us from the Great Recession, but there's decent evidence that it lessened the impact. Europe's been doing the same failed policies for 4-5 years now, why not try something new?

A friend of mine, Taiwanese, early 40's, immigrated to US three years ago. He is owner of a software company. A year after settling down in US, his wife was diagnosed with breast cancer. She flew back to Taiwan for all her cancer treatment, which included surgery and radiotherapy. Aftercare has continued every 6 months. She flies back for that. The most unbelievable part of the story is, my friend told me, because they have socialized medicine there (btw, their standard of care is top-notch, state-of-the-art in the world), not only was his wife's medical treatment essentially free, he too was covered for his stay in the hospital(to be by her side) during her convalescence.

Finding a job is not easy for my nieces and nephews who all graduated from elite schools and in useful fields around the time you did (2009 plus or minus 2). A niece, MD, pediatric specialist, bilingual (English/Spanish), wanted to land a job in California, but competition was so keen (competing with her own color) she ended up having to take an offer from another state.

Self-reliance is a wonderful thing. So is the hard work required to attain and maintain it. The two are not only the ideal of a wholesome life, it is what gives a person dignity and pride.

But the fostering of self-reliance should not be confused with the shifting of hard work from those holding the seat of political power to those who have to function at its mercy.